BEC 4 M3 Ratio Analysis of Forecasts and Projections

Question 1

Working Capital

Answer 1

Current Assets-Current Liabilities

Question 2

Current Ratio

Answer 2

Current Assets/Current Liabilities

Company’s ability to meet short-term obligations. Higher the better.

Question 3

Quick (Acid Test) Ratio

Answer 3

(Cash+cash equivalents+marketable Securities+Receivables)/Current Liabilities
More conservative way than current ratio to measure company’s ability to meet short-term obligations. Higher the better.

Question 4

Cash Ratio

Answer 4

(Cash+cash equivalents+marketable securities)/current liabilities
More conservative way than quick ratio to measure company’s ability to meet short-term obligations. Higher the better.

Question 5

Operating Cash Flow Ratio

Answer 5

Cash Flow from Operations/Current Liabilities

How much cash is generated from operating activities to cover current liabilities. The higher the better.

Question 6

Working Capital Turnover

Answer 6

Sales/Avg Working Capital
Used to evaluate how well the company converts working capital ($ used for operations) into sales (# derived from operations). The higher the better.

Question 7

Inventory Conversion Period

Answer 7

(Avg inv/COGS)*365

How long it takes to turn inventory into sales. The shorter the better.

Question 8

Receivables Collection Period

Answer 8

(Avg net rec/net credit sales)*365

How long it takes to turn A/R into cash. The shorter the better.

Question 9

Payables Deferral Period

Answer 9

(Avg Accts Pay/ COGS)*365

How long it takes to pay vendors back for credit purchases. The longer the better.

Question 10

Operating Cycle

Answer 10

Inv conversion period+Receivables collection period

The lower the better, as its how long it takes to convert inv into cash

Question 11

Cash Conversion Cycle

Answer 11

Inv Conversion period+receivables collection period-payables deferred period
The lower the better, as this measures how long it takes to convert inventory into cash and pay its own vendors

Question 12

Debt to Equity Ratio

Answer 12

Total Liabilities/Common Stockholders Equity

Higher ratio means more risk, as there is less equity compared to liabilities

Question 13

Debt to Asset Ratio

Answer 13

Total Liabilities/Total Assets

Higher ratio means more risk, as there is less assets compared to liabilities

Question 14

Times Interest Earned Ratio

Answer 14

Earnings Before Interest and Taxes (EBIT)/Interest Expense

How much funding a company has to pay required interest expense for debt

Question 15

Gross Margin

Answer 15

(Sales-COGS)/Sales

How profitable a company is after taking into account all costs of sales

Question 16

Operating Margin

Answer 16

Operating Income/Sales

How profitable a company is after taking into account all costs of sales and operating expenses

Question 17

Net Profit Margin

Answer 17

Net Income/Sales

How profitable a company is after taking into account all costs of sales, operating expenses, interest and tax

Question 18

Return on Equity

Answer 18

(Net Income-preferred dividends)/Avg shareholders equity

How much $ of profit is generated by $ of equity

Question 19

Return on Assets

Answer 19

Net Income/Avg total assets

Higher means generating more profits relative to base of assets

Question 20

Inventory Turnover

Answer 20

COGS/Avg Inv